Limited RBI Intervention To Stem Rupee Fall-VRK100-13Jan2012

Limited Direct RBI Intervention

To Stem Rupee Fall

Rama Krishna Vadlamudi, HYDERABAD   13 January 2012
www.ramakrishnavadlamudi.blogspot.com

According to the latest data released by Reserve Bank of India, the net sales of US dollars in the month of November 2011 amounted to $ 2.92 billion or Rs 14,800 crore. This sale of dollars indicates that the RBI had directly intervened, though in a limited way, in the foreign exchange markets to stem the sharp fall of Indian rupee against the US dollar since August 2011. In 2011, the rupee fell by about 20% against the dollar.

The RBI has resorted to direct intervention by selling US dollars to arrest the fall of Indian rupee. This is despite the stated position of RBI not to resort to direct intervention except in circumstances of what it calls as “extreme volatility.” The cumulative net sales of US dollars by RBI from September through November 2011 amounted to $ 4.7 billion or Rs 23,689 crore.

The rupee fell sharply from a level of 44.75 in the first week of August 2011 to 52.70 in the third week of November 2011 prompting RBI to sell US dollars which temporarily halted the sharp decline of rupee. But later the rupee fell further to levels of 54 in the third week of December 2011 before rising. (The rupee closed at 51.57 on 12 January against the dollar). The latest data from RBI indicates that the RBI should have intervened directly in the foreign exchange markets in December 2011 also.

The figures for the month of December 2011 will be known only in the second week of February 2012. RBI announces data on sale and purchase of USD with a lag of two months. The data for the month of November 2011 is released now. 

The data till November 2011 confirms the market rumours of direct intervention by RBI. The RBI has also taken some indirect measures to boost confidence in the markets to arrest the sudden and sharp rupee depreciation.  

Sale/Purchase of US Dollars by Reserve Bank of India

Month	Purchase (+)	Sales (-)	Net (+/-)	Outstanding
				Net Forward
	US Dollar	US Dollar	US Dollar	US Dollar
	Million	Million	Million	Million
2011:Nov	-	2,918	-2,918	-1,620
2011: Oct	-	943	-943	-
2011:Sep	-	845	-845	-
2011: Aug	-	-	-	-
2011: Jul	-	-	-	-
2011: Jun	-	-	-	-
2011: May	-	-	-	-
2011: Apr	-	-	-	-
TOTAL 2011-12	-	4,706	-4,706	-1,620
TOTAL 2010-11	2,450	760	1,690	-
TOTAL 2009-10	4,010	6,645	-2,635	370
TOTAL 2008-09	26,563	61,485	-34,922	-2,042
TOTAL 2007-08	79,696	1,493	78,203	14,735
TOTAL 2006-07	26,824	-	26,824	-
TOTAL 2005-06	15,239	555	14,684	-

              Source: RBI

As shown in the above table, RBI resorted to heavy buying of US dollars during the financial years 2005-06, 2006-07, and 2007-08. During those years, India was enjoying surplus position in current account (total exports higher than total imports). In addition, India received heavy inflows from the Foreign Institutional Investors (FIIs) due to optimism in the stock market.

But, the FII flows into stock markets reversed in 2008 due to heavy selling in Indian stock markets; and collapse of Lehman Brothers Inc in September 2008 that led to meltdown in global financial markets. During 2008-09, RBI had been forced to sell US dollars to arrest the rupee fall with the net sales of dollars amounting to $ 35 billion – this is against total net purchase of US dollars by RBI amounting to $ 120 billion between 2005-06 and 2007-08.

As per the above table, the outstanding net forward (sales) position as at the end of November 2011 is $ 1.6 billion.

Outlook on Rupee

After touching a low of 54.68 on 14 December 2011, the rupee has appreciated to levels of 52 now due to a variety of factors, that include, limited direct intervention by RBI, indirect measures taken by RBI, resumption of FII inflows due to strength in equity markets with the Sensex reclaiming 16,000-level, and steps taken by RBI to curb speculation.

The rupee has been facing pressure from various quarters – right from the Eurozone crisis, strength of dollar against other major currencies, India’s rising current account deficit, sharp rise in short-term external debt, concerns about lack of policy initiatives from the Indian government, slowdown in India’s GDP growth, etc.

There are some expectations in the market about RBI cutting interest rates in the near future with the coming down of food inflation and signs of overall easing on the inflation front. If RBI starts cutting interest rates, one can expect some more inflows from FIIs into the stock markets.

The movement of rupee against dollar will depend on several factors as mentioned above. If the Indian government moves forward with some policy initiatives, we can expect the rupee to strengthen. However, with several state elections taking place in the few months, one cannot be too sanguine about policy initiatives. Overall, the outlook for rupee remains hazy.

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Read more about the Indian Rupee:

Indian Rupee Continues to Fall

Reasons for Indian Rupee’s Fall

Stocks, Bonds, Rupee and Inflation

Foreign Exchange Losses and India Inc

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Note on author: Author is an investment analyst and writer. The views are personal and this is written only for information purpose. The author has a vested interest in the stock markets. Readers are advised to consult their certified financial adviser before taking any investment decisions.

Author’s articles on financial articles can be accessed at:

www.ramakrishnavadlamudi.blogspot.com

Indian Rupee Continues to Fall-VRK100-14Dec2011

Indian Rupee

Continues to Fall

Should RBI Intervene to Arrest Rupee’s Relentless Fall?

Rama Krishna Vadlamudi, HYDERABAD   14 December 2011
www.ramakrishnavadlamudi.blogspot.com

In September 1998, Nelson Mandela wrote to speculator-cum-philanthropist George Soros asking how South Africa should deal with currency speculators like Soros himself. Writing back, Soros said that it was always futile to defend any indefensible exchange rates and instead urged the South African leader to avoid excessive short-term external debt and to maintain stringent supervision over local banks.*

We do not know whether South Africa benefited from Soros’ advice of non-intervention in foreign exchange markets. But, the Reserve Bank of India seems to be following a hands-off policy when it comes to dealing with the Indian rupee’s sharp depreciation against the US dollar since the second week of August 2011.

Between August 2011 and now, the rupee has fallen by almost 20 percent against the dollar from a level of 44.74 to 53.51. On 13 December 2011, the rupee touched an intra-day low of 53.51 before settling at 53.23 at day’s close.

The sudden depreciation has shocked many Indian companies and others engaged in foreign trade, investment, etc. Importers and companies with external debt with un-hedged exposures are caught unawares. Many Indian companies (net foreign exchange spenders) declared high exchange losses during the July-September quarterly results. The costlier dollar (versus the rupee) has made life difficult for Indian travellers and students studying abroad.

* Source: “Soros – The Life and Times of A Messianic Billionaire” by Michael T. Kaufman

The fear is that the exchange losses for India Inc may continue during the current quarter (October-December 2011) also.

Countries, like, Switzerland and Japan are grappling with currency appreciation. But, in India we are facing the opposite situation of a sharp depreciation of the domestic currency against the US dollar.

What is troubling the rupee?

The current depreciation of rupee can be attributed mainly to two factors: 1. external and 2. domestic. The external factor is the massive appreciation of dollar against other major currencies, which caused short supply of dollars impacting the value of rupee negatively. The domestic factors that worked against the rupee are: slowdown in India’s GDP growth rate, sharp deterioration of industrial activity as measured by IIP, persistent inflation, growing current account deficit indicated by single-digit exports growth and double-digit imports growth, political logjam on various economic issues, rising fiscal deficit, weakness in stock markets, etc.

Basically, the rupee fall is exaggerated by some sort of self-fulfilling prophecy. The expectations of rupee falling to 50 were developing in August 2011 when rupee fell to 47. When it fell to 50 levels, experts predicted that rupee would further go down to 52 levels. Now they talk of rupee touching 56 or even 60 levels and the cycle goes on!

The empirical evidence suggests that it is extremely difficult to predict levels in foreign exchange markets. In July this year, everyone expected the US dollar to fall further against other major currencies. But to everyone’s utter surprise, the dollar has gained more than 10 percent in the last four months or so!

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Read more about the Indian Rupee:

Reasons for Indian Rupee’s Fall

Stocks, Bonds, Rupee and Inflation

Foreign Exchange Losses and India Inc

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Should RBI intervene to shore up Indian rupee?

Amidst chaos and large foreign exchange losses, a clamour has arisen from various quarters demanding the RBI to intervene in the markets and stall the rupee’s free fall against the dollar. In the past RBI intervened to either arrest the appreciation or depreciation of rupee. As such, whenever some trouble arises, there have been demands to RBI to protect the interests of the vulnerable entities.

Between August and October 2011 when the rupee depreciated from 45 level to about 50 level, the net sale of US dollars was practically nil indicating the RBI’s non-interventionist policy. The official RBI position is: “We don’t target a level of exchange rate. The exchange rate is determined by the forces of supply and demand and other factors. We may intervene if there is excess volatility.”

It is not clear whether the RBI still thinks the 20-percent fall of rupee versus the dollar is not “volatile” enough for it to intervene in the markets. If it has to strengthen the rupee, RBI has to sell dollars, part of the government’s official foreign exchange reserves, in the market. Opinion in the RBI seems to be veering to the view that the country’s foreign exchange reserves are precious and they have to be conserved for any future eventuality.

The RBI’s figures show India’s foreign exchanges reserves at $ 314 billion (Nov.11). Whereas, India’s total external debt is put at $ 317 billion (Jun.11). While the total external debt to GDP is comfortable at 17.4 percent (Mar.11), it is the share of short-term external debt (within one year residual maturity) to total debt at 42.2 percent (Mar.11) that is a big concern now.

The RBI has kept its focus on taming inflation. India has experienced elevated levels of persistent inflation for the past three years. To curb inflationary pressures, RBI has raised interest rates 13 times (by 375 basis points or 3.75 percent) in the last 18 months. With the GDP growth rate in jeopardy now, the general expectation is that the RBI may relax its monetary tightening. There is also speculation that RBI may cut cash reserve ratio (CRR) for banks to improve liquidity.

On 16 December 2011, RBI is set to announce its quarterly review of monetary policy. Though food inflation has come down to 6.6 percent, RBI may not give any indication of rate cuts for the time being. Unless there are clear signs of inflation coming down to the RBI’s comfortable level of five to six percent, RBI may not be in a position to loosen its hawkish interest rate policy.

RBI has been following ‘managed float’ exchange rate policy for several years. Managed float is some sort of a via media between a floating rate system and a fixed rate system. Depending on various factors, RBI tries to maintain some balance between the extremes.

Currency Interventions of the Past

Interventions in the past by central banks proved to be useless many a time. The famous instance was the Bank of England’s attempt to defend the pound sterling. Their failed attempt to defend pound in 1992 is said to have cost the UK Treasury more than $ 5 billion at that time. After the 1992 bitter experience, there has been no attempt either by the UK government or the Bank of England to intervene in foreign exchange markets.

The billionaire investor George Soros mentioned at the start of this article is credited as “The Man Who Broke the Bank of England.” His Quantum fund made a profit of $ 1 billion in September 1992 when the UK government withdrew pound sterling from Exchange Rate Mechanism leading to 20-percent depreciation of the pound sterling against the deutsche mark-DM, Germany’s currency before the birth of euro. The currency speculators’ bets proved correct and they made huge profits at the cost of reputation of UK and Bank of England.

Surprisingly, the pound recovered to its pre-ERM level of DM 2.95 per pound within a year. The massive devaluation of pound seemed to have helped the UK economy as the nation’s unemployment fell, growth accelerated and investment picked up within one year of the ERM fiasco. Clearly, a non-interventionist policy worked for them.

But, there are some instances of central bank (and/or government) intervention working well in the foreign exchange markets. The notable examples are G-7 action in March 2011 and Plaza Accord of 1995. In March 2011, the US Federal Reserve in a coordinated action with other Group of 7 (G-7) nations intervened in currency markets and bought US dollars against Japanese yen to arrest the steep rise of yen (against the dollar) after earthquake and tsunami struck Japan. After the G-7 action, the yen fell from 76.25 to 81 level against the dollar in just one day. Prior to G-7 action, the yen rose to 76.25 from 83 level. The intervention worked for about three to four months.

Prior to 1995, the US dollar was rising continuously against other major currencies. Discomforted by the steep appreciation of the dollar, the US government came to an understanding (at Plaza Hotel, New York) with Germany, France, Britain and Japan to arrest the over-valuation of dollar. After this accord (known as Plaza Accord), the dollar underwent a remarkable depreciation against other major currencies, in particular, yen and deutsche mark. This had given a big boost to US exports in the following years.

Conclusion

The RBI seems to be in a mood to conserve the precious foreign exchange reserves for any future eventuality in the next few years. The eurozone sovereign debt crisis is yet to unfold fully. If and when the eurozone breaks up (some experts are not completely ruling out such a possibility), India may need the official reserves if there is any further run on the rupee led by selling from the foreign institutional investors in the Indian stock market.

As George Soros commented in the beginning of this article, it may not be a good idea to defend rupee which may cost the government heavily as had happened in the case of the UK’s efforts to defend the pound sterling in 1992.

Strictly speaking, we cannot compare India with the UK. The UK has capital account convertibility and allows free movement of capital in and out of the country. The same is not the case in India. India is following a very cautious approach when it comes to capital account convertibility. Despite the recommendations of two Tarapore committees, India still has kept lot of capital controls in place in order to protect the domestic economy from external shocks of the kind the world has witnessed in the past.

Due to the protected environment, it is hoped that the currency speculators may not be able to give big shocks to Indian rupee.

RBI is still giving primacy to providing price stability at all costs over other policy objectives of growth and exchange rate. Until inflation shows clear signs of waning, RBI will continue with its tight money policy. It would be interesting to watch the response of the Union Government if RBI continues with its non-interventionist stance on dollar-rupee exchange rate.

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Abbreviations:

GDP                 - Gross Domestic Product or national income

IIP                    - Index of Industrial Production – a measure of industrial activity

Note on author: Author is an investment analyst and writer. The views are personal and this is written only for information purpose. The author has a vested interest in the stock markets. Readers are advised to consult their certified financial adviser before taking any investment decisions.

Author’s articles on financial articles can be accessed at:

www.ramakrishnavadlamudi.blogspot.com

Indian Rupee Falls - vrk100 - 15Sep2011

Indian Rupee Falls

Rama Krishna Vadlamudi, Hyderabad 

15 September 2011  

                      

The Indian rupee has touched a two-year low against the US dollar. One dollar was fetching Rs 44.74 on 5 August of this year when Standard & Poor’s downgraded US credit rating by one notch. Now, after nearly six weeks, one US dollar is quoting at Rs 47.65 – the closing price on 14 September recovering from an intra-day low of Rs 48.01. What this means is that dollar has become more expensive by around three rupees or 6.5 per cent. Considering that the dollar-rupee exchange rate was not very volatile in recent times, the steep depreciation of Indian rupee against US dollar is quite surprising.

What caused the	At present, there is dollar shortage in the market, not
rupee to fall	only in India but across the world. The dollar has started
against the dollar?	appreciating against the Euro, pound sterling and other
	major currencies in the past two weeks. Foreign Institutional
	Investors have sold $1.7 billion (Rs 7,670 crore) worth
	of equity investments in Indian stock market in the last
	six weeks.
	However, market experts say the Indian rupee is
	falling due to weak growth in India's national income,
	dollar buying by oil marketing companies for their oil
	import and technical factors. Foreign exchange
	traders may be resorting to arbitrage for short-term profits.
What factors may	The global uncertainities caused by sovereign debt crisis
work against the	in the US and euro zone.
rupee in the	Growing current account deficit (imports more than exports).
short-term?	More selling by FIIs in Indian stock market.
Whether RBI will	It is difficult to tell whether or not RBI will intervene
intervene?	to buy or sell dollars in the forex market. Between
	July 2009 and July 2011, RBI's intervention in the market
	was practically nil. RBI resorted to buying and selling of
	US dollars heavily and routinely between Nov.2006 and
	June 2009.
	However, there are market rumours that the RBI had
	intervened in the market on 14 September to stop the
	rupee from falling beyond 48-level.
	RBI in public says the rupee value is determined by the
	forces of supply and demand. However, if the volatility
	is too much in the markets, they will definitely intervene.
	Sometimes, mere statements from RBI will do.
What is the impact	Obviously, the biggest beneficiaries are exporters provided
of rupee fall on	they have kept their positions open. However, importers
the markets?	are negatively affected as they have to pay more rupees
	for the same dollar when rupee falls or dollar goes up.
	In general, exporters and importers cover their positions
	through forward contracts and other derivatives.
	The stock prices of software majors, like, TCS, Infosys
	and HCL Technologies have gone up on 14 September.
2007 losses	In 2007, rupee appreciated against the dollar up to
	39-level which was not anticipated by Indian companies.
	These Indian companies suffered heavy losses of up to
	Rs 20,000 crore as they bought wrong types of hedging
	instruments from banks.
What factors may	Strong exports growth which are doing well of late.
support rupee in	Indian Interest rates are higher than those in the US.
the medium term?	Interest rates are rising in India while US stagnates.
	If some stability comes to the markets from euro zone.
Whether rupee will	Financial markets always caught us unawares either on
touch 50-level?	the upside or on the downside. When rupee is falling
	suddenly, everybody will try to buy dollars creating
	short-term aberrations. It will take some time for the
	markets to stabilize. Till then, we need to be watchful
	and expect the unexpected. Expectations about future
	interest rates and exchange rates play a major role in
	the markets. RBI is expected to raise Repo rate by
	25 basis points (0.25%) during the 16 September meet.

References: SEBI and RBI

Disclaimer: The author’s views are personal. There is risk of loss in trading. Readers need to consult their financial advisor before taking any trading positions in the markets.

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